Paying off mortgage Versus 529 Plan

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Paying off mortgage Versus 529 Plan

Postby Cosmo » Sat Mar 16, 2013 10:20 am

Hi everyone,

Wanted to get your thoughts on what to do with an extra $500 per month. I am trying to decide whether to pay off our mortgage or fund my boy's 529 plans. I presently max out my work 401(k) and both of our Roth IRAs. I am in the 25% tax bracket with a healthy emergency savings account. I have two boys, 4 and 7 years old, who both have an underfunded 529 plan in their name.

Refinanced to a 15 year mortgage -$203K at 2.875% last fall. Given this, we will still have a mortgage payment while my first one is in school. I came across this post from a few years ago but the numbers where a lot different -a much higher interest rate over 30 years versus 15. So should I apply the extra $500 to the mortgage, the 529 plan or some combination of the two?

So, fellow Bogleheads, what say you?

Thank you in advance,
Cosmo
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Re: Paying off mortgage Versus 529 Plan

Postby Xanadu » Sat Mar 16, 2013 10:53 am

Do you live in a state that offers a state tax deduction for 529 contributions?
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Re: Paying off mortgage Versus 529 Plan

Postby snowman » Sat Mar 16, 2013 11:34 am

I cannot answer your question, but I keep recommending this book for college financial planning purposes: "Paying for College Without Going Broke, 2013 Edition (College Admissions Guides)" by The Princeton Review. They publish it every year, and it is in my opinion the best available resource for parents. I would not make any financial decisions without reading it first. There will be sections directly addressing your question.

It is true that the rules for financial aid are changing every year (that's why annually updated editions), but it will give you pretty good idea how to best prepare for that future expense in your personal situation. There are so many constant and changing variables that nobody can offer you correct answer on this or any other forum. Even if your final plan will not be perfect, and may need some adjustments in the future, it will be way better than having no plan at all.
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Re: Paying off mortgage Versus 529 Plan

Postby letsgobobby » Sat Mar 16, 2013 12:36 pm

If there is a chance you will receive need-based financial aid (and that primarily depends on your income and your countable assets - which exclude retirement plans and for the FAFSA your primary home equity) then you are better off paying off your mortgage from that standpoint. But you don't have to do that now; you can do it closer to when your oldest goes to college.

Your mortgage rate is very low. If it's fully tax deducible, then no rush in paying it off. After the tax benefit, you pay to borrow for 15 years about what the US government pays to borrow for 10 years.

What I would do (actually, it is what I do) is invest in 529s/taxable accounts now, and when my oldest goes closer to college in about 10-12 years, I will assess the financial aid landscape at the time and if it makes sense, I will sell taxable holdings to pay off the mortgage.
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Re: Paying off mortgage Versus 529 Plan

Postby Cosmo » Sat Mar 16, 2013 12:53 pm

Thank you all for your thoughtful suggestions.

Xanadu: I live in Texas so no state income taxes.

Snowman: Thank you for the book recommendation. I will check it on on Amazon.com.

Letsgobobby: I am kind of leaning in the direction of applying extra payments to the kid's 529 plans and maybe part of it in taxable.


Additional suggestions welcome. Thanks!

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Re: Paying off mortgage Versus 529 Plan

Postby BornInCA » Sat Mar 16, 2013 1:38 pm

other than paying off the mortgage, retirement, and kids' colleges, do you have other financial goals such as car purchases, home improvements, vacations, and kids's weddings after college graduation?

those may need to be factored in. Perhaps investing in taxable (50-100%) would be best. 529s you should put in the minimum:
1.) Enough to avoid annual maintenance feees
2.) Enough to get the maximum state benefit (state match/state income tax deduction) if applicable.
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Re: Paying off mortgage Versus 529 Plan

Postby kenyan » Sun Mar 17, 2013 12:04 am

Sounds unlikely that the OP gets any tax benefit from the mortgage, with no state income tax and a low rate + balance (unless he donates substantially to charity or has some other large deduction). Still, the rate is low even with no tax benefit. No, it's not as low as a risk-free rate, but I'm not satisfied with receiving the risk-free rate in my long-term investments.

I would invest elsewhere - in the 529 if I had no other pressing financial goals - but I could reasonably see other choices as valid.
Retirement investing is a marathon.
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Re: Paying off mortgage Versus 529 Plan

Postby Cosmo » Sun Mar 17, 2013 2:13 pm

kenyan wrote:Sounds unlikely that the OP gets any tax benefit from the mortgage, with no state income tax and a low rate + balance (unless he donates substantially to charity or has some other large deduction). Still, the rate is low even with no tax benefit. No, it's not as low as a risk-free rate, but I'm not satisfied with receiving the risk-free rate in my long-term investments.

I would invest elsewhere - in the 529 if I had no other pressing financial goals - but I could reasonably see other choices as valid.


Thanks, I am leaning towards a combination of the 529 plan and my taxable account. I still get the tax benefit from the mortgage, thanks to my $7,000 property tax bill (yay, no state income tax!).

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Re: Paying off mortgage Versus 529 Plan

Postby bdpb » Sun Mar 17, 2013 4:06 pm

Cosmo wrote:
kenyan wrote:Sounds unlikely that the OP gets any tax benefit from the mortgage, with no state income tax and a low rate + balance (unless he donates substantially to charity or has some other large deduction). Still, the rate is low even with no tax benefit. No, it's not as low as a risk-free rate, but I'm not satisfied with receiving the risk-free rate in my long-term investments.

I would invest elsewhere - in the 529 if I had no other pressing financial goals - but I could reasonably see other choices as valid.


Thanks, I am leaning towards a combination of the 529 plan and my taxable account. I still get the tax benefit from the mortgage, thanks to my $7,000 property tax bill (yay, no state income tax!).


Do you get the full tax benefit of your mortgage interest deduction? All other deductions would have to exceed the standard deduction before you get the full benefit of mortgage interest.

Do you have an opportunity to pay your property tax bill and charitable contributions every other year? With no mortgage interest you could double up these payments in one year and take the standard deduction the next year for additional tax savings.
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Re: Paying off mortgage Versus 529 Plan

Postby snowman » Sun Mar 17, 2013 7:17 pm

Cosmo,

no need to pay for the book, just get the latest available edition from your local library. It will put you on the right path - for free.
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